Corporate shareholders have certain rights that must be respected. If a company fails to follow a shareholder agreement, or it infringes on its shareholders’ rights, it may be subject to a lawsuit. Shareholder lawsuits can be drawn out and contentious, and they can present a costly challenge to the company. The business attorneys at Feldman & Feldman represent both shareholders and companies in lawsuits.
These days, shareholders have broadened the types of cases they file against companies. From a shareholder’s perspective, they want both to know that their investment is in safe hands and that the company is acting according to an established set of principles. From the company’s perspective, it wants investment and capital from shareholders while maintaining some freedom to run the business in a way that maximizes its profits and shareholder value.
The Rights of Shareholders
Shareholders have numerous rights, but it is important to remember that a company’s management has relatively wide latitude within the law to run the company in the way it sees fit.
Owners of common stock in a company have the right to:
- Receive dividends as promised (although there is no absolute right to receive a dividend)
- Vote on major issues, including for directors and corporate transactions
- Own a portion of the company
- Inspect corporate books and records
- Transfer their ownership to someone else
- Sue the company for wrongful acts
Shareholders invest their money in the managers of a company as much as in the company itself. They do not have the legal right to run the company, so they place their trust in these managers. It is not an exaggeration to say that a shareholder’s money is in the hands of corporate management. If the board and those who run the company are not honoring their obligations, shareholders should find a way to take legal action.
The Different Types of Shareholder Litigation
Shareholder litigation can take on a number of different forms. In one type of case, an investor is filing a lawsuit against the company for the drop in the value of their investment. The investor is trying to recoup money from the company itself. For example, the investor may have lost money because the company is alleged to have committed fraud. Alternatively, they may have invested on the basis of incomplete or inaccurate financial reports the company provided.
The other major form of shareholder lawsuit is when the shareholder files a case on behalf of the company itself. This type of case is known as a shareholder derivative suit. It is called derivative because the shareholder is not filing the case on their own behalf; instead, they are stepping into the shoes of the company and filing a lawsuit against the company’s directors or executives for alleged misconduct. Any proceeds from a jury award, verdict, or settlement would be paid to the company as opposed to the shareholder. Nevertheless, shareholder derivative lawsuits still protect and benefit shareholders because they can stop certain conduct and return money to the company that the shareholders own shares of.
Breach of Fiduciary Duty Lawsuits
One of the common forms of shareholder litigation described above is a case against corporate directors for breach of their duty to the company.
A corporate director owes a fiduciary duty to their company, which has two components:
- The duty of care to exercise reasonable diligence under the circumstances in making corporate decisions. Corporate directors should not act negligently, but they are protected when they make good faith decisions under the business judgment rule.
- The duty of loyalty to place the company’s interests ahead of their own. Directors may not engage in conflicts of interest, which can include transactions with related entities.
Corporate directors and executives must protect themselves. When they make decisions, they should do their homework and consult with legal counsel when necessary. Directors should err on the side of caution, or else they can find themselves personally liable for the business decisions they make.
Fiduciary Duty to Minority Shareholders in a Closely-Held Company
When a company is a closely held company, the fiduciary duties owed may be heightened when there are minority shareholders who lack the power a majority shareholder likely has. Here, the majority shareholder may owe a fiduciary duty to minority shareholders.
The following are examples of how majority shareholders may breach the fiduciary duty they owe to minority shareholders:
- Repurchasing shares of stock from majority shareholders without giving minority shareholders a similar chance to sell
- Selling the entire company to a new owner who may have plans to take actions that can harm the company
- Publicly offering shares of the company without allowing minority shareholders to sell their stock in the offering
- The failure to suitably investigate a new buyer of a controlling interest in the company
- Exercising their duties in a way that increases their own power and financial well-being at the expense of the minority shareholders
- Allegations that corporate executives are overpaying themselves
- Alleged waste of company assets
- Other means of persecuting minority shareholders, such as freeze-outs and denying access to corporate records
Many shareholder lawsuits seek some form of financial compensation. This remedy is the preferred one for most courts. However, some shareholder lawsuits also want to put a stop to the behavior that caused the lawsuit. For example, if a shareholder is being frozen out, they may either want access to certain items or for the company to be sold entirely.
Injunctive Relief in a Shareholder Lawsuit
In addition to the payment of money, courts can also order a company to do or not to do something. This court order is known as equitable relief and comes in the form of an injunction. Courts often view injunctive relief as an extraordinary remedy, but a judge may be more likely to grant it in a shareholder lawsuit. A court can order equitable relief in shareholder lawsuits under the following circumstances:
- When monetary relief alone would not be enough to put an end to the harm that the plaintiff is suffering.
- When a certain result would be unfair to one of the parties.
- When the continuation of certain conduct would present a grave and immediate danger to either the company or the shareholder.
For example, a shareholder may have filed a lawsuit regarding wasting corporate assets. The shareholder not only wants compensation (for themselves or the company), but they also want the alleged illegal activities to stop. If the court does not order an immediate end to the conduct, it could irreparably damage the company. The court could order a preliminary injunction while the case is pending, or a permanent injunction if it rules in favor of one of the parties.
Shareholder Litigation Can Be Difficult and Emotional
The smaller the company, the more contentious and hostile shareholder litigation may be. In some cases, a minority shareholder can have much of their net worth locked up in their shares of the company. Oftentimes, shareholder litigation in a closely held company is between long-standing business partners or family members that are unable to come to an agreement. These cases often involve rivalries and they may be the final step in a series of conflicts that have lasted for years. Each of the shareholders may have a large part of their net worth at stake in the company, and they thus may each have their own strong opinions. In these cases, each shareholder could benefit from hiring an experienced legal professional to help them communicate with each other. It can be possible to defuse tensions before shareholders end up in court; however, if a dispute turns into a lawsuit, shareholders need an attorney who will fight hard on their behalf.
Shareholder Lawsuits About Corporate Values and Actions
These days, shareholders have become much more active in pursuing litigation against the company in which they own stock. Now, shareholders are filing lawsuits based on corporate behavior. These cases include allegations regarding:
- The failure to abide by certain climate change goals and reporting requirements.
- Shareholder unhappiness over corporate diversity practices, including diversity of the board of directors.
- Employee workplace issues, such as sexual harassment at the company.
Given the increasing use of environmental, social, and governance (ESG) principles in investing, and new Securities and Exchange Commission rules in this area, companies can expect more lawsuits of these types in the future, even if plaintiffs do not yet have a track record of success.
Shareholder Lawsuits May Be Avoidable
Shareholder litigation may come at the end of a protracted disagreement between shareholders and a company or various owners. While these lawsuits are often necessary to protect the interests of certain owners, they are also best avoided if at all possible. If you believe that you are in conflict with another shareholder or corporate management, you should consider hiring an attorney early in the dispute to potentially help you resolve the disagreement without the need for litigation.
Shareholder litigation can be damaging, both for the company and the individual shareholders.
For the company, shareholder litigation may involve the following:
- Spending a large amount of corporate resources on attorneys’ fees.
- Negatively impacting the company’s reputation because the lawsuit is public.
- Disrupting the company’s normal business operations because the owners need to spend time on the lawsuit.
- A final fracture in the relationships among the shareholders that could have otherwise been avoided.
Therefore, you may want to consider the following before either filing a shareholder lawsuit or taking a case all the way to trial:
- Communicating your thoughts and concerns with the other shareholder(s) or owner(s) directly, either in person or through letters from attorneys.
- Hiring a mediator to help the parties talk through the problems and reach a possible resolution. Our business attorneys can help you in the mediation process, representing your point of view.
- Settling the lawsuit before it reaches a costly and expensive trial.
- Negotiating a possible separation, where one shareholder will buy out the other.
Why You Need a Shareholder Lawsuit Attorney
You should have an attorney representing you at all times during the course of a potential shareholder lawsuit. The stakes in this kind of litigation are high, regardless of whether you are a minority shareholder, a majority shareholder, or a company director.
The business lawyers at Feldman & Feldman can do the following for you:
- Review the circumstances of your case and make initial recommendations about the best course of action and what you should do as the dispute unfolds.
- Communicate your position to the other party and potentially negotiate with them. For example, negotiating a sale agreement of stock.
- Help you come up with a potential solution or remedy to the issue at the center of the dispute.
- Take your case to court or defend you against a lawsuit that has been filed against you and/or your business.
Contact a Houston Shareholder Litigation Attorney Today
Our attorneys represent both shareholders and companies in litigation. You should contact us early in the dispute because you may need to take quick legal action. If you delay too much, you could see irreparable harm in the meantime. To speak with one of our experienced attorneys, you contact us today.